What is Gap Insurance? Is it Worth to Buy?
Updated: Mar 10, 2022
Car insurance Policy
Car insurance Policy is a contract or agreement between you and the insurance company which protects your finances against a theft, an accident or any other natural causes or destruction of your insured car. The company agrees to pay a certain insured amount if any mishap happens to your car as outlined in the policy. The coverage includes Property damage, Liability or any medical bills.
Types Of Insurance Coverage
Liability Coverage - It provides coverage for both the body injury and property damage caused to another by you or others covered under the policy.
Collision Coverage - It provides coverage for the damage done to your car by hitting another car or any other property such as building, fence, wall etc.
Comprehensive Coverage - It provides coverage to the damage occurred due to the theft , vandalism, theft, wild life collision and other unpredictable events.
Gap (Guaranteed Asset Protection) insurance is an optional insurance coverage which can be added on to your original insurance policy. They are also called as Loan/Lease gap protection. It estimates the actual value or market value of the car and the amount you owe on the car and the difference is covered by the Gap Insurance. This cannot be obtained from a standard collision and comprehensive insurance policies. Though it is not mandatory, it carries certain benefits and offers financial protection for the amount you owe on the car.
Who needs a Gap Insurance?
Person A buys a new car and he failed to get a gap insurance and one year later, his car got totaled or stolen. In a standard insurance policy, totaled car is covered under Collision coverage and Stolen car is covered under Comprehensive coverage. The breakdown explanation of costs are given in the tabular below. The values given in the table below are all assumed values, they don't reflect the original insurance costs or values.
Person A buys a brand new car
Stanadard Insurance + Gap Insurance
Value of brand new car
Person A 's monthly payments
After a year, Person A's car is totaled.
Value of the car at the time of accident
Total amount of loan paid
Person A Pays
In this example, Person A buys a brand new car at the value of $40,000 a year back. This Tabular explains what would have happened if the Person A decides to buy Standard insurance alone or Gap insurance along with the standard insurance.
Person A pays his monthly payments of $500 for 12 months, so the total amount of loan paid after a year will be $6000. After a year, the car got totaled and the current value of the car after the loan payment is $34,000.
The insurance paid out is calculated by the Actual cash value or Market value of the car.
The market value is calculated usually at a rate of 20% depreciation per year.
Market Value = Value of the brand new car - (Value of the brand new car * 20/100)
= 40000 - (40000*20/100)
= 40000 - 8000
Thus, the Standard insurance pays out only the market value of the car, so the Standard insurance will pay out $32,000 of the current value of the car during accident ($34,000). The rest $2000 is paid by Person A plus the deductible amount.
If you have a Gap insurance, it covers the difference between the amount you owe and the market value of the car. Thus, Person A doesn't have to pay anything except deductibles which are mandatory in all the insurance payouts.
Is it worth to buy?
When there is a significant amount of difference between the amount you owe for the car and the car and the car's value, then adding Gap insurance coverage is very beneficial to protect your finances. You may consider buying Gap insurance in certain scenarios.
Leasing your car - Many lenders require you to buy Gap insurance to safeguard their finances.
Down payment less than 20% - instances where you more amount that you owe for the loan of the car
Financing for 60 or more months - The longer the financing period of the car loan is, the more you owe on the loan than what the current worth of the car is.
Higher Depreciation rate - Some cars have high depreciation rate than normal which in turn makes the market value of the car depreciate quickly owing more on the loan.
Loan rollover - If the loan amount you owe is greater than the value of the car at the time of renewal, Gap insurance helps you to protect you against negative equity.
Stolen, Totaled car - Gap insurance can protect your finances if the car is totaled or stolen.
Luxury brands like BMW, Jaguar, Land Rover, Mercedes-Benz, INFINITI, Volvo, Lincoln, Porsche, Acura, Audi, Tesla, Cadillac, Lexus, etc.. tends to depreciate at higher rate than the principal pay down, resulting in car value less than the car loan. So Gap insurance is valuable to these brands. Learn more here.
What does Gap insurance does not cover?
There are some scenarios in which the gap insurance does not provide coverage.
Engine Failure - Gap insurance does not cover mechanical repairs.
Deductible and Down payment - Gap insurance provides coverage only for the amount you owe, not on the Deductible and Down payment.
Property or Bodily injury , Death - Gap insurance does not cover the property damage caused in an accident, bodily injury caused or death or disability due to an accident, medical bills, loss of wages, Financial hardship etc
Rental reimbursements - Rental reimbursements are not covered when your car is in the auto shop for repair.
Thus, Gap insurance coverage is the coverage which helps provide the difference between the amount you owe and the amount covered by the Standard insurance coverage.The events and items covered by your insurance policy differs based on your policy and insurance provider. The conditions and limitations of the coverage vary upon your specific policy.
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